Death and Taxes - Capital Gains Version

Inevitably, while we are definitely long term investors, there comes a time when we deem it appropriate to sell companies that have done extraordinarily well for us over many years (even decades in some instances).  We painstakingly consider the ramifications of these actions as it relates to capital gains taxes for those who own these companies in taxable accounts.  While the long term capital gains tax rate for federal income taxes is preferential to income taxes (20% for most investors), in high tax states like California where capital gains taxes are taxed at the same rate as income, the bite that the government takes is significant (13.3% at the highest rate, which is most of our clients).  Add in the Obamacare surtax on capital gains which most of our clients are subject to as well (additional 3.8% on capital gains) and the damage is simply painful.

Nonetheless, as they say: "death and taxes"... the only certainties in life!

This is where we cue our long standing response to the concerns about capital gains taxes: "Write your congressman"!  And while we definitely think each client subjected to such taxation should regularly complain to their representatives in Congress about how poorly they appropriate our money, we understand that seems to fall on deaf ears these days; especially in California!

All that aside, we emphasize that we absolutely MUST consider the investment merits of our decisions first and foremost, and relegate tax-related decisions to second place.

We use tactics throughout the years to minimize capital gains taxes by harvesting losses when and where we deem it appropriate, from an investment standpoint.  Most of the time that involves buying more of a loss position, waiting 31 days (so as to avoid wash sale rules) and then selling the original shares that were purchased at higher prices and carry losses.  Not surprisingly, oftentimes that results in losses being completely wiped out (buying low...!), but who's complaining if that is the outcome?  It is an effective tactic for realizing losses while still maintaining a position in a company that we believe to be temporarily impaired.

Additionally, when considering tax-loss harvesting, we almost never wait until the end of the year to practice such maneuvers.  It is then that most novices are taking tax losses, and we would much rather be in the position of buying those shares from people that are making poor investment decisions to save on taxes.  In our experience, those folks are usually falling into the "penny-wise and pound-foolish" trap.

One of the concerns that investors have is that they often don't know where they stand throughout the year with respect to realized capital gains and can end up in tax penalty situations for lack of withholding in the tax year.  Here, we note that every custodian we work with provides that information, generally on the front page of the statements, each and every month of the year.  We urge clients who have that concern that they monitor those monthly statements, or even have their tax advisers do so on a periodic basis throughout the year.  However, it is important to note that those realized gains/losses can change rapidly throughout the course of the year as conditions on the investment side of the equation (the most important side) change.

We have been most fortunate to have the types of above average returns for our investors that have created such problems as capital gains tax liabilities.  While we wish the government were more frugal and less willing to confiscate our money that we first earned, and pad taxes, and the risked, made money, and paid taxes, we are not holding our breath.  Long-time readers of our writings know that we believe the economy would be much stronger if the government didn't spend money at the frenetic pace that it does, but we get by in spite of such profligacy, and will continue to do so!
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The Fixation on Debt



For years we have addressed the issue of debt for our investors.  It seems there are very few issues that strike fear in the hearts of investors like that of debt.  Whether the debt be personal, corporate or government, very often it is used by the crisis industry (otherwise known as media) to make even the most savvy investors shake in their boots!

First Trust's Brian Wesbury has, over the years, been a voice with which we agree on most topics.  We urge investors to listen to his latest video in which he uses very plain language to put the "debt issue" into context.  

Simply put, it is the productive economy, the income it generates and the assets it holds that must be looked at when determining whether or not debt levels are concerning.  We would narrow it down even further and simply suggest the most important issue concerning debt is that it be used for productive purposes.  Since the U.S. is one of the most productive economies in the history of the world, that alone is enough to make us less concerned about debt.

Should we completely ignore it?  Absolutely not!  Should we lose sleep over it?  Not a chance, as long as the ratios continue at the levels they currently stand.  $22 Trillion in debt versus $300 Trillion in assets is workable!
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Investment Climate Jan 2019: The Very Strange Correction





What a difference one quarter makes!  In our last Investment Climate (October 2018), we wrote that we “…certainly expected a sizeable correction in the markets…”.  Lo and behold, we got one!  Now in our fourth decade of professionally managing portfolios and having been through corrections and bear markets many times over those decades (1987, 1991, 1994, 1998, 2001-2, 2008-9, just to name the big ones), we can safely say this was one of the strangest.  As broad-based and strong of a rally as we saw in the first nine months of 2018, we saw an equally broad-based sell-off that began in September and continued on through Christmas Eve day, culminating in the worst Christmas Eve stock market performance ever, and ultimately, the worst December performance since 1931. 

One would think that something big like world war, world-wide famine, massive weather events across the globe, or a global disease plague had engulfed all the nations of the world, all at the same time. Nothing of the sort occurred.  Instead, the Federal Reserve raised the Federal Funds target rate from a range of 2.00%-to-2.25% to 2.25%-to-2.50%, the third quarter earnings season was solid against increasingly difficult previous-year comparisons, and the fear of higher tariffs on imported Chinese goods were considered the culprits.  Along with the “mania” fabricated by the media over these issues and a solid dose of ever-increasing “algorithmic trading” (computers trading instead of humans), the markets just plain had a “hissy fit”.  We recently described the event as such in a blog post on our website at www.taylorfrigon.com for those who want a further description of a hissy fit.

Another aspect of this correction (that would not have been obvious to the average investor) is the extremely low volume which accompanied this setback.  Typically, when something very impactful is happening in the markets, at some point volume swells and then a “capitulation” happens (or the proverbial “throwing in of the towel”), typified by high volumes.  At least in our portfolio, we observed very low levels of volume in most of our companies.  And that low volume trended lower as the correction got more severe, which is exactly the opposite of what one might expect.  We cannot arrive at a definitive answer as to why that was the case this time, except to say that there was a classic “buyer’s strike” happening.  But we are not willing to say that was the only reason and continue to seek out further explanation for the occurrence.

Perhaps the strangest, and almost surreal aspect of this market episode, has been a sense that there is now a well-entrenched “crisis industry” that has captivated media, economics, politics and popular culture.  We have commented on the pervasive media negativity that has persisted for years, and the constant drumbeat of impending doom that seems to emanate from the financial punditry.  However, this time it appeared as if it was even more “manufactured” than ever before.  Perhaps it was simply all too coincidental, but it certainly underscores -- and we believe validates -- our point that it is essential to make investment decisions based on the business merits of a company.  Our process is rooted in such an approach and has been for decades. 

From that perspective, we fully intend to own companies through multiple market and economic cycles.  When doing that, it makes these volatile environments much less of a concern.  No doubt, it makes planning for both individual and institutional investors crucial, but we are convinced it is the best way to build wealth over time. 
We are extremely encouraged by the companies in our portfolio as many of our “narratives” derived from our views on demographics, business processes and technological innovation, are really coming into their own right now.  We have transitioned out of some companies that we owned for many years, such as Fiserv and Amazon, and have repositioned our portfolio for these new and exciting ideas to come to fruition.  

For example, in our demographics “schema” the focus on how millennials manage their finances is highlighted by companies like Green Dot and Alliance Data Systems.  As baby boomers age, companies like NovoCure (cancer treatment) and Glaukos (glaucoma) are helping them live healthier and longer lives. 

Regarding business processes, the way engineering projects are managed is being reordered by NV5 Global, and companies’ IT processes are being revolutionized by EPAM Systems, to name just a few.   Zuora is helping companies who have embraced the “subscription economy” by making it much more efficient to run businesses that require the complex accounting for recurring revenue streams that come from subscriptions. 

As for technological innovation, which continues to be the primary driver of growth everywhere, it is going through its own transitions as intelligent data processing begins to emerge in “edge clouds,” dwarfing the processing done today in centralized data centers.  Companies like Quicklogic for low-power programmable processing, and Nvidia for massively parallel processing supporting artificial intelligence and machine learning are driving these trends.  Vuzix with their innovative “Blade” glasses are enabling the AR phenomenon to become “reality”. 

Many of our companies cross over into multiple schemas and narratives, adding even greater opportunities that are tied to these various business trends on which we are focused.  We can simply say we are more excited about the possibilities our companies represent than we have been in many years.  No correction, nor bear market will shake that enthusiasm!  Stay tuned and stay invested!


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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The Return of the "Hissy Fit"!


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We have discussed many times over the last decade or so how the market's reactions to scary headlines and prognostications of gloom can be described as a "hissy fit".  You know, it's like the reaction of the spoiled child who is told they can't have any more candy: stomp out of the room in a huff and whine and complain for hours as if that is going to make a difference.  Worse yet, and certainly the root cause of "spoiled child syndrome," the parent gives in and lets the child have what they want only to find the child finds something else to be "pissy" about.

Obviously, given the way markets have acted lately, clearly the markets are the child, and one might argue a combination of the Federal Reserve and the financial media are the parent!  As we are about to witness yet another Fed meeting this week, and the paranoid in the financial world are all atwitter about what the wizards of money are going to do with interest rates, one would think the sun rises and sets based on their actions.

It is our belief that the economy suffered greatly by the overdone and excessive "zero interest rate" (ZIRP) policy by the Fed in the wake of the 2008-9 financial debacle,  the effects of which served to distort the concept of risk in the minds of investors.  Essentially, with zero percent interest rates, time was considered to have no value and, thus, the desire to risk capital over time considerably dried up.

Just as the Fed has begun to get its sanity about it and taken steps to correct that distortion, the drumbeat has become louder and louder that they should stop raising the target for interest rates, in order to save the economy from certain recession.  These calls are coming from the same folks who have been predicting for ten years now that we were sure to be heading for Armageddon in the financial markets and the economy, only to have been consistently proven wrong.  No doubt, at some point, there will be a "correction" in the economy, and it will likely be due to the Fed overreaching and raising rates too high.  Or it may come from some external shock.  Or it may simply be a normal "cycle correction" -- as is perfectly normal in a dynamic economy.

Nonetheless, the violence with which markets have reacted to these fears has amounted to the worst hissy fit we have seen in a few years.  Certainly, correcting stock prices are also a normal occurrence in the markets.  However, the ferocity of this correction and the wild day-to-day swings (even intra-day swings) have been something to marvel at.  We have also noticed that, at least in our portfolios of growing companies, the volume of shares trading has been quite low, given the volatility.  It may be part of why we are seeing this level of "manic" market activity.  It's been a sort of "buyers' strike," if you will.

All of this reminds us of what our mentor, Dick Taylor, used to counsel: "are you going to let 1% of shareholders tell you what your businesses are worth on any given day?"  Those are words by which every investor would be wise to live.  And as markets seem to relentlessly be stuck on a downward spiral, remember that this too shall pass, and those who have taken a business approach to investing will be best served, and live to experience the inevitable recovery.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
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The Fixation on the Fed



Regardless of what the Chairman of the US Federal Reserve said yesterday, including his "two words", the bigger issue is the extent to which the financial punditry continues to be so enthralled in the analysis of every word that comes out of the Federal Reserve, as if the Fed were the primary harbinger of growth in the economy.

This is total nonsense!  

The Fed is at the center of the world for bankers and financial engineers – so their obsession with monetary policy is understandable. But investors should be careful of confusing the financial world and the banking world with the world of real products and services, where the vast majority of real investment opportunities are to be found. 

The Fed has never invented any product, written a single line of software code, navigated a business through the volatility which it often fosters with its constant manipulation of currencies, and thus is a terrible determinant of a sound investment.  

Simply put, the Fed is better at getting in the way of innovation, which ultimately is what creates economic growth, than it is at fostering innovation.

And this same punditry, which has been calling for a recession every year since the end of the Great Recession of 2008-9, is back at it again.  They are once again stoking fear and consternation in the minds of investors of all stripes (individual and institutional) with their suggestions that the strong economy is likely headed for a downturn based on higher interest rates, "end of stimulus," Brexit, Italy's budget woes, and on and on!

This gets to the heart of why we don't "do the market"!  Okay, realistically, we have no choice but to occasionally do so when we want to buy or sell a company, but, truly, the best advice is to ignore these market fluctuations, comments from the Fed, comments from "Economists" (who rarely actually recognize the important trends in innovation), financial media "experts" (usually "traders") and pay attention to the businesses in which one is invested.  

We have long subscribed to the notion that we will own our businesses through multiple market and economic cycles as those businesses deliver innovation and creativity to their customers/clients and value to us as shareholders.  This is the way we believe we can get the best returns on our investment.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
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